Industrial production declines in May

Industrial production declines in May

Industrial production fell 0.2% in May, as a strong dollar and low oil prices continued to hurt manufacturers and crude producers. Mining activities declined 0.3% as oil companies scaled back well drilling, while manufacturing declined 0.2% on a rising greenback that made their exports more expensive overseas, the Federal Reserve said.

That missed consensus estimates of a modest 0.2% increase in the overall index, according to forecasting company IHS Global Insight. Industrial production, an index of manufacturing, mining and utilities (gas and electric), is closely followed as it can contribute to changes in the business cycle, according to NASDAQ. Shrinking industrial production, while slightly improved from April, is part of an ongoing stagnation in manufacturing. Even though April’s production slump ended up higher than initially reported, May continued to see mining, utilities, consumer goods, defense, construction all in decline.

“Manufacturers will continue to struggle with the impact of the dollar’s rise for some time yet,” Paul Ashworth, an economist with macroeconomic research company Capital Economics, wrote in a note. In fact, manufacturers have faced a series of challenges in the first half of the year. Harsh winter weather hampered growth early on. Plus, U.S. exporters have seen their goods become more expensive for foreign buyers. The dollar has continued to rise on the possibility of Fed interest rate hikes, while the euro has weakened with falling rates and a weak economy. Oil is finally starting to rebound after crude oil has fell from close to $100 per gallon to just under $60 in the past year, leading oil and drilling companies, and related industries, to cut back.

On top of ongoing challenges for the refining sector, Barclay’s analyst Jesse Hurwitz pointed to unexpected weak demand for items like food, beverages, tobacco, chemicals and paper. Based on May’s report, all signs point to more subdued industrial production in the short term. But decreasing oil prices also have a potential upside – with motor vehicle sales showing “remarkable strength” according to Hurwitz’s note. “Bright spots were few and far between, but the sole glimmering sector continued to be motor vehicles, where output rose 1.7% to rack up its third consecutive solid gain,” wrote economist Michael Montgomery, for IHS Global Insight.